With inflation at just 1pc, should I renew NS&I index-linked certificates?

Ask an expert: A reader asks whether they should rollover their NS&I
inflation-proof bonds

My NS&I Index-Linked Savings Certificates are about to mature next month and I need to know whether I should cash them or renew for another five or three year term. Given that inflation is so low, should I not put the cash elsewhere? OS, via email

Inflation dropped below zero for the first time on record earlier this year, but last month turned positive once again, with the consumer price index (CPI) rising 0.1pc in May.

The retail price index (RPI), another inflation measure, is currently running at 1pc. It is the RPI measure which NS&I Index-Linked Savings Certificates guarantee to beat.

The bonds have terms of either three or five years.

Five years ago, when you first invested, the bonds paid a higher additional return of 1pc.

Inflation was also higher, with RPI at 4.8pc. So you would have earned decent tax-free return on your savings, especially valuable to those who pay the higher tax rates of 40pc or 45pc.

Today the returns are less exciting, but financial planners argue that the bonds are well worth rolling over, particularly given that the bonds are no longer on general sale.

Only those existing investors such as yourself can continue to invest.

Patrick Connolly, of Chase de Vere, the adviser, said: “Inflation is expected to pick up from here, although probably not to the levels which you experienced with your current holding.

"But you also need to consider that interest rates are still at historic lows, and so most savings accounts are paying relatively little anyway.

“If you don’t need to get your hands on this money, don’t want to risk losing your capital and don’t strongly believe that inflation will remain very low, there is a good argument for rolling over this money. Perhaps if you select a three year term you can then assess the prospects for inflation and interest rates again then.”

Dave Penny of Invest Southwest, the adviser, agreed. He said: “In the overall scheme of things 1.05pc is not very exciting. Tax-free alternatives include a five-year fixed rate cash Isa paying 2.5pc with the State Bank of India or 2.1pc for three years.

"But should inflation take off in the upcoming years, the index linking protection could be valuable.

“Walking away from these investments should not be a decision taken lightly."

The bonds - sometimes nicknamed "linkers" - have not been on general sale since 2011, but savers who already have money in the certificates can roll over the investment for a further three or five years.